How to structure a partnership for real estate deal

Question

We are a few friends looking to invest in multifamily apartments (<4 units) in Ohio. We haven't done real estate deals together earlier. We need guidance on how to structure our partnerships. Are there templates that can work as good starting points for us.

Also, we will be doing standard downpayments and financing. So, should we create LLC and get the loan in the name of LLC or should we take the loan individually.

Should we have umbrella insurance to protect ourselves?

Gino Barbaro · Answer

@Sharad Bagri

I would pick up the phone and call an attorney. If you are all going to be active in the business, then you can probably structure as a joint venture. I'm not an attorney, and I would contact @Kim Lisa Taylor with structuring.

Avoid templates at all costs, especially with laying the foundation for your business. An attorney can create an operating agreement for you and give you ideas on what to include in your operating agreement.

Loans will probably be personally guaranteed, so it doesn't matter if it's in an LLC. LLCs are for asset protection, another phone call you should be having with an entity attorney.

Gino

Basit Siddiqi · Answer

You have not done real estate deals in the past as a group or also individually?

If no one within the group has experience buying real estate, I would suggest you each buy a property on your own and then have a discussion of forming a partnership in 2-3 years.

If you already have experience within the group, I would suggest all the friends get together over coffee and brainstorm all your concerns. Bring these concerns to an attorney for him to draft the operating agreement.

Some things to discuss would be
1) What happens if partner A Dies
2) What happens if Partner A wants out of the partnership
3) How long will this partnership last?
4) How often will partners get paid?

Alexander George · Answer

I'm not a lawyer or expert on deal structuring but what we see the most common is a single GP (general partner) and a number of LP's (limited partners). The general partner runs the show while still putting down an initial amount of equity. The LP's are basically passive investors. I would think very carefully about ceding control over the investment given you are all inexperienced. Ask yourself, if it was Christmas Eve and there was a major problem at the property, who would rush to deal with it and who would want to push it off until tomorrow? The person who you know will get stuff done needs to be the GP. The people who would be drunk off egg nog and not answering their phone should be LP's. If it was my deal, I would:

A: Ask to be GP or no deal

Or

B: Become a LP's in someone else's deal (you'll still get a good return) and then you can learn the ropes of syndication and real estate

Just my 2-cents

Joshua Janus · Answer

Definitely hire an attorney to draft up the operating agreement. I also use the spreadsheet below to assign responsibilities and roles for a 50/50 partnership this way there aren't future stones unturned.

https://docs.google.com/spreadsheets/d/1n_bMwHPxIYY6WeE_tdCQ...

Gregory Wilson · Answer

First, accept the premise that partnerships rarely work. There are a lot of studies on this but it is not the immediate response from professionals whose business it is to document all the ifs and and buts of a partnership and to  problem solve for the inevitable problems. I try to discourage anyone who consults me from doing any partnership. The worst are three person partnerships.The most stable are 10 or more. A two person partnership at 50-50% each has been often described as legal malpractice.Consider having persons assume the roles they will actually perform and document that role:The guy who finds the deal is the owner. The person who runs the operation (rentals repairs, bill paying) is a manager. The person who puts in the money or whose guarantee gets the loan is the money lender. All of those roles can be established by contract with appropriate compensation. And, if there is a sale they can share in the equity. There isn't any role in multi-family rentals below a couple hundred doors that requires two persons in charge.But when the starting stalls gate opens and the horses come out, there is only one jockey on the horse.

Ashish Acharya · Answer

@Sharad Bagri When structuring a partnership for your real estate investment, here are some key considerations:

1. Create an LLC: Forming an LLC for the partnership can protect each partner's personal assets from liabilities. The LLC would own the property, and you could outline each partner’s equity share and responsibilities in an Operating Agreement. However, LLCs do not provide any tax savings. Work with an attorney or CPA for tax-efficient entity structuring.

2. Loan in the LLC’s Name: If possible, get the loan in the LLC’s name. This keeps the liability within the LLC and maintains the separation between personal and business assets. However, if you go this route, be aware that lenders may require personal guarantees or charge higher interest rates. If you take the loan individually, you can later transfer the property to the LLC, but that may trigger due-on-sale clauses or tax implications.

3. Operating Agreement: This document should outline each partner’s investment, share of profits/losses, decision-making authority, and exit strategy. You can find templates online, but it’s best to consult an attorney to customize it for your situation.

4. Umbrella Insurance: Yes, having umbrella insurance is a good idea. It provides additional liability protection beyond standard property insurance, which can protect your personal assets if the LLC's assets aren't sufficient.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Justin Moy · Answer

I'd get a real estate lawyer and tell them the structure and partnership you want to create. They will ask you a lot of questions about how things will be structured within the group and write up your legal docs.

You will likely create an llc you will all be owners of. % of ownership will be part of the conversation you have with the lawyer.

As far as capital goes, those will be written in the legal docs as well if there are requirements of capital contributions, if so how much, who is responsible for what. If one partner is more capital intensive vs others all that will be spelled out.

Sharad Bagri · Answer

Nope, not yet. Assembling.

Remington Lyman · Answer

You should consult your attorney, CPA, and lender for answers. Have you assembled this team yet?

Sam McCormack · Answer

I have a lawyer I would connect you with on this. Shooting a message now

How to structure a partnership for real estate deal

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